Taxing the sickest and most vulnerable is counterintuitive

Raising VAT from 14% to 15% is going to disproportionately affect the poorest and most vulnerable members of society and plunge them into deeper levels of poverty. Yet, undeterred and desperate to plug the rapidly expanding fiscal deficit the South African government chose this route instead of opting for measures to reduce the size of the over-bloated state.

VAT is a regressive tax. The amount paid on a certain product as a percentage of its price is the same for rich and poor people. The tax burden for that given product consumes a larger share of a poor person’s income than that of a rich person. If the goal is to help the poor, raising VAT is counter-intuitive. Apart from the obvious response to not increase VAT and focus on reducing government spending, Parliament has said that it is looking at ways to mitigate the effects of raising VAT – including zero-rating more items.

According to the WHO, “Countries at all income levels raise taxes from the sales of medicine. Yet some countries, including low-income countries, specifically exempt medicines from all taxes. The price-responsiveness of demand for medicines has been measured in several settings and shown to be positive but less than one, meaning that an increase in price, other things being equal, will reduce demand and vice-versa. Some groups of people – the poor and the elderly – are more sensitive to price changes than others.”

The table below depicts a basket of goods that a patient would be able to purchase if the South African government did not impose VAT on one month’s supply of an anti-retroviral therapy (comprising Efavirenz/Emtricitabine/Tenofovir). The VAT component of this ARV treatment totals approximately R93.83 (at a rate of 15%). If the South African government zero-rated this treatment, this imaginary individual would be able to purchase the following goods:

Sources: Dis-Chem pharmacy and Pick ’n Pay. Prevailing prices as at 28-02-2018

The monies received from VAT on pharmaceutical products and devices add a relatively insignificant amount to the South African government’s coffers. However, as the table above has attempted to demonstrate, sick people could use the money that would have been spent on VAT for more beneficial alternatives, including food.

If a healthy and productive workforce is a primary objective of the South African government, surely it can appreciate that to tax the sick and vulnerable is counter-intuitive? If the South African government is serious about increasing access to medicines to the poorest of the poor, it should zero-rate VAT on all medicines and pharmaceutical devices or at least the medicines contained on the World Health Organization’s Essential Medicines List – medicines that experts consider the most important for improving global health for the world’s poorest. 

The South African government needs to bear in mind that it should not prevent people from improving their quality of life, especially the poorest members of society. Exempting medicines – or at least medicines contained on the WHO’s Essential Medicines List – from VAT would benefit those who most need relief from taxes. In a democratic state, the exemption of VAT from medicines should be both politically popular and feasible. The elimination of taxes that keep essential medicines out of the hands of the poorest of the poor should therefore be a priority for the South African government.

Author Jasson Urbach is a director at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.